Startek Inc (SRT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StarTek first-quarter 2006 earnings conference call. My name is Onica, and I will be your operator for today. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

At this time, I would now like to turn the call over to Ms. Jennifer Martin, Director of SEC Reporting and Compliance. Please proceed, ma'am.

Thank you and good morning. It is a pleasure to have you with us today. Thank you for your continued interest in StarTek. With me on the call today is Steve Butler, our President and Chief Executive Officer, and Rodd Granger, our Chief Financial Officer. Steve will begin our prepared remarks today with an overview of our business, and Rodd will follow with a review of our financial results. At the conclusion of our prepared remarks, we will conduct a question-and-answer session with instructions following at that time. This call will conclude no later than 10:30 AM Eastern time. For those of you who have not yet received a copy of our press release from this morning, please go to www.StarTek.com where you can download a copy from the Investor Relations section of our website.

Please note the discussion today may contain certain statements which are forward-looking in nature pursuant to the Safe Harbor provisions of the federal securities laws. These statements are subject to various risks and uncertainties, and actual results may vary materially from these projections. StarTek advises all those listening to this call to review our 2005 Form 10-K posted on our website for a summary of these risks and uncertainties. StarTek does not undertake the responsibility to update these projections. I will now turn the call over to Steve Butler.

Thanks, Jennifer. Good morning, welcome and thank you for this opportunity to speak with you this morning. When I spoke to you last, I indicated that our first quarter would be a quarter of expansion for us. I also told you that our financial results would be negatively affected by this expansion as we brought three new call centers on line. During the quarter, there were three primary factors that contributed to our overall financial results.

The ramping of our three new call center facilities for clients we contracted with late in 2005 produced both positives and negatives to our results. Although only one call center became operational during the quarter, we experienced incremental revenue contribution from the new clients as revenue grew 7% over the same period last year. However, we also incurred significant additional expenses from the wrapping of these three new call center facilities which negatively affected our margins. I will get into further detail later in the call.

We also experienced a higher level of attrition during the quarter than anticipated, which we believe to be the result of wage pressures from an improving economy and increased competition from other local businesses in the areas we operate. Attrition training typically ranges from four to six weeks depending on the client and usually not paid for by the client. We experienced some margin pressure with our largest client as a result of an increased number of agents in transition training to convert some of their AT&T wireless subscribers to Cingular as part of the whole merger process. Although we are paid for this type of training, it does not produce the same amount of revenue dollars as if these agents were taking all of them before.

Let me get into more detail by giving you some color around the impact of the ramping of the three new call centers first. Our revenue from the new clients contributed an additional $6.6 million to our top line. We remain optimistic that this number will only increase as we continue through the ramp process with these clients. As I told you in our last call, we would not begin to see the full financial impact from these clients until midyear. However, as we anticipated, our financial results were negatively affected by the continued ramping of our new facility in Petersburg, Virginia, as well as the initiation of ramps for our two new call centers in Ontario, Canada.

Our two new centers in Ontario went on line in April. As these facilities go online, there is a timing issue between revenue and expense as we incur additional recruiting, hiring and training expense on the front end to staff our facilities. This phenomenon causes depression in both our gross and operation margins on the front end. As each facility gets clustered to capacity, we expect to see margins start to improve.

Our Petersburg facility began taking calls on January 5 of this year. Since that time, we have started taking on more volume from our customer there and have been continually hiring and training new agents to service that demand. There have been challenges associated with recruiting the right type of agents, and as a result, attrition for the quarter was a bit greater than expected.

We also are aware that attrition will always be greater during the ramp of a new facility due to the volume of people that you are hiring in a short period of time. We are still progressing along the ramp plan, and although the process is moving at a healthy pace, it remains slightly behind the initial progress we had anticipated. Our expectation remains, however, that we will be fully ramped within the timeframe of the plan, which currently is six months or midyear of this year.

Our Hawkesbury and Thunder Bay facilities began taking calls around the first week of April. We are still in the early stages of ramp in both of these facilities and, therefore, are experiencing more expense than revenue. But the ramp is progressing according to plan. Rodd will operate on the specific financial impacts of the ramp later in the call.

From an operational perspective, we experienced some challenges in the quarter related to the higher attrition across many of our sites. This has resulted in an increased training and hiring cost in the quarter compared to the same quarter last year. Again, we believe this to be a byproduct of an improving economy, increased competition and overall higher cost of living for employees. As a result, we have started to experience rate pressures in many areas of the United States in which we do business.

Also, as I mentioned earlier, attrition training ranges from four to six weeks depending on the client and is not paid for typically by the client. We are addressing these issues with a sense of urgency as it is a priority of the Company.

During the quarter, we also experienced a greater number of agents in training, particularly at Cingular where we continue to transition agents from blue to orange service as I mentioned earlier. Due to the complexity of some of our clients' products, training can have a significant impact on our operations and financial performance because of the length of time it takes to train a customer care agent. As a result, the more people we have going through various types of training, the greater the effect on our earnings. We expect to see the number of agents in the transition training decline over the remainder of the year, but this is not indicate that we will expense an overall decline in training as new products, clients and attrition will continue to have an effect on the level of this expense.

As to a client update, obviously most of you are probably concerned and focused on Cingular. We began the process of negotiating our contract with Cingular during the quarter. At this stage of the negotiations, it is too early to disclose anything about the details of this contract, including potential pricing structures. But we are pleased to say that negotiations are progressing well, although at a slower pace given their recent announcement of a possible merger with BellSouth. However, we do remain confident that we will be successful in concluding these negotiations in the near-term as our relationship with Cingular remains very strong.

I will now turn the call over to Rodd Granger who will give you a brief overview of our financial results for the quarter.

Thank you, Steve, and good morning. I would like to start out my discussion by reminding you that all comparative information relates to comparable periods in 2005 and 2006 unless otherwise noted.

Revenue for the first quarter of 2006 was 7.1% or $3.8 million higher compared to the first quarter of 2005. As Steve mentioned earlier, revenue from clients new to StarTek since the first quarter of 2005 contributed an additional $6.6 million to our top line. We also experienced increased revenue in volume from T-Mobile during the quarter. These positives were offset somewhat by declines in Cingular revenue and the impact of loss revenues from a former utility client. The decline in Cingular revenue was a combination of decreased production volume during the quarter and having more agents in training related to the transition from blue to orange service. While these agents generate revenue during training, it is at a lower rate than generated in production.

Revenue concentration during the first quarter of 2006 was as follows -- Cingular 46.6%, T-Mobile 22.4%, AT&T 9.9% and all other clients combined 21.1%. Comparables for the same period of 2005 were Cingular 56.6%, T-Mobile 21.5%, AT&T 11.6% and all others combined 10.3%.

With the addition of our new clients, our revenue was less concentrated than last year. As we continue to expand these new relationships, we feel this trend will continue. Gross profit for Q1 of '06 was $9.8 million, down $2.9 million from Q1 of '05. Gross margin was 17.1% and Q1 of '06 compared to 23.8% in Q1 of '05. We incurred an additional $1.3 million in ramp costs at our three new facilities, primarily related to training during Q1 of 2006.

As previously mentioned, we had decreased production volume in more agents in training related to this transition from blue to orange service for Cingular. This caused a decline in Cingular margins during the first quarter as (indiscernible) was billed at lower rates. A strengthening Canadian dollar versus the U.S. dollar in Q1 of '06 compared to Q1 of '05 also had a negative impact of $800,000 during the quarter. Incremental depreciation expense included in cost of sales was $500,000 higher in Q1 of '06 and was related to our new call center in Petersburg, as well as IT infrastructure investments.

Selling, general and administrative expense for Q1 of '06 was down slightly compared to Q1 of '05. As a percent of revenue, Q1 '06 SG&A dispense were 13.3%, down from 14.4% in the comparable period. Our cost-saving initiatives implemented in 2005 resulted in a year-over-year decrease in SG&A expenses. Offsetting these savings were incremental hiring expenses related to the ramp of new facilities during the quarter which were approximately $400,000. Our FAS 123R compensation costs were minimal during the quarter.

Operating profit declined $2.8 million in Q1 compared to the same period in '05. The decline was a result of lower margin experienced in the quarter as previously discussed. Net interest and other income increased $100,000 or 19.8% year-over-year. This increase was driven by higher portfolio income during 2006.

Income tax expense was down $1.5 million. The decline was the result of lower earnings before tax and the favorable outcome of a tax audit. We had previously set up a tax valuation allowance, and upon resolution of the audit, we were able to release $400,000 of this reserve to income during the quarter. Including the effects of our supply chain business, which is presented as discontinued operations in our 2005 statement of operations, net income was 500,000 lower in Q1 of '06, ending the quarter at $2.1 million. Fully diluted earnings per share from continuing operations for the first quarter was $0.14 in 2006, down from $0.23 in 2005. Fully diluted earnings per share including discontinued operations for the first quarter of 2006 was also $0.14, down from $0.18 in 2005.

Basic and diluted shares for the first quarter of 2006 were 14,636,000 and 14,823,000 respectively. Our cash, cash equivalents and investments ended the quarter at $35.9 million. This is down from year-end when the balance was $45.6 million. This decline was mainly the result of capital expenditures of $7.5 million related to the investments in the buildout of our three new call centers. This investment led to a decline in working capital of $6.7 million which ended the quarter at $65.3 million. Our days sales outstanding increased slightly to 68 days in Q1 from 64 days at year-end. This was the result of a short delay in the receivable payment from one of our larger customers.

With that, I would like to hand the call back to Steve for a discussion of our dividend and his closing remarks.

Thanks, Rodd. As most of you know, we announced a dividend today of $0.25 per share, which we bid on May 25 to stockholders of record as of May 15. As with all other quarters, the board along with the senior management group reviewed our cash position in conjunction with what we see as being the best return for our stockholders in determining the dividend for the quarter. The board and management has always maintained that we would utilize our cash reserves in such a manner that it would provide the greatest returns to our stockholders while giving the Company the flexibility it needs to compete.

During the past few months, we have made significant capital investments in expanding our operations and continued to evaluate the cash requirements necessary to fund our growth opportunities while maintaining a strong balance sheet. As I have stated before, we will assess the dividend every quarter, and we will adjust it as needed in determining our best use of cash, as well as the best return for our stockholders.

In summary, as we ramp up the call, the first quarter was, indeed, an expansion quarter and our margins totally reflect that, but also one that was encouraging as we saw revenue from new clients increase at a healthy rate. We remain diligent in the ramp process, which we expect to take at least another three months between the three new facilities. We are encouraged by our progress thus far and the increasing demand from our new clients. Our focus remains on completing these ramps successfully, delivering high quality of service to our clients, completing contract negotiations with Cingular, finding better solutions to attrition and pursuing organic and other forms of growth for the Company.

I will now open up the call for the question-and-answer session, so please stand by while the call operator provides you some instructions.

(OPERATOR INSTRUCTIONS). Josh Vogel, Sidoti & Co.

Just a couple of questions for you. You were talking about the Asian attrition in the quarter. I was just curious if you could quantify the numbers for us?

Not specifically because the attrition rates obviously vary overall by site, and it is different between Canada and the United States. I think the main point of the attrition was in the ramp in the new call centers that we are putting online because of the rapid pace at which we are trying to hire people, and we saw a bit more turnover in that area than anywhere else. We do have some issues in some of our operations, but primarily it related to the ramp process.

Okay. Prior to the buildout of these three new centers, can you give us some utilization numbers?

You mean as far as (multiple speakers) capacity utilization?

Yes, capacity illustrations.

No, obviously we have always maintained two things. One, we will always have some excess capacity on hand to meet the demands of the clients, usually a facility's worth. And secondly, we are not out there building a new facility without some commitment from a new and/or current client that says they are willing to help me fill the facility. So we certainly would not have brought three new ones online if we do not think we needed the capacity to meet demand.

Okay. And then in terms of these center buildouts, should we now be looking for margins and earnings to ramp up in the second half of the year, or should these expenses be smoothed out across the entire year?

You know, I think I have always said that it would be midyear before we started to see any kind of real impact. So certainly we would anticipate the second half of the year to produce better results than the first half at this point as we continue to ramp.

Okay. And I was just looking at your Accounts Receivable balance. Accounts Receivables are up year-over-year. Gross margins are down. I know that the buildouts are factored in there a bit. But have you been giving customers more pricing discounts and/or possibly more lenient payment terms?

No, I talked earlier about our DSO going up by four days from the year-end, and basically what this was is one of the payments slipped to the first week in April. So it is just a slight timing difference is what we experienced.

Okay. And just finally, have you thought about possibly doing anything to hedge against a Canadian dollar?

Yes, we do hedging now. What we have is we hedge about a year out on our expected exposure to the Canadian dollar, so we're continually putting hedges on and adding those onto the back-end.

Toby Sommer, SunTrust Robinson-Humphrey.

A question for you about the amount of capacity you have now, necessarily utilization. How many seats do you have now? What is the relative change based on the three centers that you are putting in there? What kind of growth and capacity does that imply?

Well, most of our call centers average 4 to 500 seats in nature as we put them online. So do the math there. Typically that is the size of most of our call centers that we have in operation. There may be a couple of them that are larger and maybe one or two that might be slightly smaller. But on average there are 4 to 500 seats.

Just one housekeeping thing. Could you repeat for me the customer mix, the revenue mix by customer for the first quarter of this year? I seem to have missed that.

Sure.

Cingular was at 46.6%, T-Mobile at 22.4% and AT&T 9.9.

So the balance would be around 21%?

Yes, 21.14 for all others.

Just a question for you about the attrition. Are you comfortable that the site selection provided you an ample supply of candidates given the higher level of attrition or anything that you could do to kind of refine that process?

Well, I think there was ample amounts of candidates. I think the refining comes in the front-end screen, making sure you are finding the right types of agents for the kinds of calls we are going to handle. That is always part of the whole -- when you're trying to ramp up fairly quickly, you really don't know that until you get into the training process, and they figure out that they don't like what they are doing or aren't enjoying the experience and then bow out.

So, if anything, I think everybody in this industry is always trying to find better ways to do front-end screening of agents. Certainly when you're ramping rapidly, you don't always have the time that you would like to have to screen a little bit better. So your turnover is always a bit greater in the early stages of any kind of a ramp.

I was wondering if you could comment generally also on what you are seeing in terms of wages? As we get into the middle/later stages of this economic expansion, I'm wondering if you are seeing any wage pressure for the people working in your centers?

Well, like I said, certainly in some communities we are. Not in all of them. It kind of depends on the area in which we are operating, what is going on in that particular community. Certainly in the communities that are nearby oil and gas sites, companies and/or fields and/or operations, you see more wage pressure there obviously than in other areas.

So yes, I mean for the most part most of our communities we don't have that issue, but there are some that we do because of the industries that surround the community in and of itself.

Okay. I was wondering if you could describe what you are seeing in terms of the new business pipeline and any particular vertical opportunities, what your current thoughts are maybe on health care and financial services, that kind of thing?

Well, I know that our sales team is actively pursuing all of those areas. I won't tell you that there -- I can tell you the pipeline, like I said before, is whatever number you want it to be. When we sign somebody, I will tell you that we have signed someone and let you know, I do know that they are very active in both of those areas, as well as the media and entertainment areas and a couple of other unique industries that we are looking at today as well. So they are shopping outside the telecom arena, let's put it that way, to a large extent.

Would you have any particular expectation relative to pricing of new deals? You know we have heard from under other industry players that the sales cycles appear to be shortening a little bit and perhaps a step up in demand for outsourcing. I was wondering if you are seeing that in the new customers that you are talking to?

As far as pricing, I don't know. That obviously is going to vary by industry and type of service that you are going to do for any particular client. I do think that the sales cycles are shortening somewhat. Of course, it does help if you have got experience in that particular industry to bring those clients to bear quicker. But there is more of a push for outsourcing as companies are searching to find ways I think to improve their bottom-lines. Certainly some of the existing clients that we have actually are starting to push more services and opportunities out their doors today. Because from a competitive factor, they have to reduce their own costs to stay competitive in the industries that they operate.

So I would agree with that assessment. I think some of the cycles are shortening. It certainly depends like with us because of the experience that we have certainly at Telecom Wireless and even some consumer retail areas, that helps to have that experience level that they can turn to in a quicker manner.

And then one last housekeeping question. Would you expect stock option expense to be relatively stable over the remaining quarters of the year?

Yes.

Arnie Ursaner, CJS Securities.

I apologize. I have been jumping in and out of your call for various fires we're putting out. Did you give us the annual expected contribution? You gave us the 6 million contribution from the new customers in the quarter. But did you give us the annual expected contribution for these same customers?

No.

Could you please?

No, I won't give you that kind of guidance only because again you are looking at a ramp process that could speed up or slow down and actually maneuver itself throughout the remainder of the year. I think what you do is you go off of a trend in the first quarter, which quite honestly was an abbreviated quarter from the aspect of only having one call center up for most of the quarter, and take that and maybe push that into the remainder of the year.

Like I told you earlier on the call -- maybe you missed this because you were in and out -- most of these clients that are new, we're not going to see the full capacity of what they can deliver to us until about midyear as we continue through the ramp. So I would tell you that after the second quarter, there should be a lot better feel for what we think the full year is going to look like from the new client.

Okay. And the business that you are taking on with these new clients, when you are fully ramped, would it be at similar or higher margins to your traditional business?

I would tell you it would be probably similar. It again depends a little bit on where we are doing the business for them at in Canada versus the U.S. to some extent because you do have the exchange rate impact that contributes to some of that. But fairly similar.

Okay. And tax rate guidance for the year, please. You were quite low in Q1. What is your guidance for the year?

Yes, in the prepared remarks, I mentioned that we were able to reverse $400,000 in the quarter due to a favorable settlement of an income tax audit (technical difficulty)-- reserved for. If you normalize for that 400,000 in the quarter, it is pretty typical about the 37 to 39%.

Okay. And you gave us -- and I appreciate that it is very favorable, but your dependence on top customers is declining as you grow the newer customers. But can you give us the industry concentration still if you would?

Yes, the industry concentration is still pretty high. I would say roughly 90% in the telecommunications industry.

So of that incremental, the 10% to 21, the majority of that is still in Telecom?

Yes.

Okay. And you reduced your dividend, you basically made the point that you're considering a number of growth opportunities. Facilities are not that expensive, so most of what I think you would have would be acquisition opportunities. Is that a fair statement?

You know, they range anywhere from acquisition to joint venture opportunities. But I guess I will disagree with you a little bit because facilities can be somewhat of an impact to your capital. I think we've given a range of like 4 to 6 million to put a facility up. So depending on the IT infrastructure and everything else that goes into it, so it is probably all of the above.

Given the facility changes both additions and whatever, can you give us your expected CapEx for the year and your expected D&A for the year, please?

Yes, I think we had previously mentioned that our CapEx would be in the 20 million range.

For the year? And D&A please?

For the year.

I think CapEx is like 20 to 25.

Yes, CapEx 20 to 25. I would say depreciation and amortization about 18 for the year.

And of the 20 to 25 for the year, did you give what it was in Q1, please?

CapEx for Q1 was 7.5 million.

Tom Carpenter, Hilliard Lyons.

You guys had about 7.5 million in CapEx in the quarter. Do you say roughly 4 million of that was for new call centers?

Yes, a little higher than that. I would say probably 4 to 5, 5.5 for new call centers.

When we are looking at the dividend cut, I think the last caller made some points that I was going to add it is probably getting it more in line with your near-term EPS. At least by the second half of year, the run-rate is going to be closer to that. But when you look out, it does give you a lot of flexibility when you're looking at opportunities out there. Can you talk about it? Can you give a little more detail or color on the opportunities whether it is from joint venture opportunities, or if you are looking if you might want to make some acquisitions that help you build business in new verticals? Can you break in new verticals without pricing? But just some of the opportunities that you're looking out there, and what do they look like these days?

Well, I think certainly we have always stated that we would be looking at diversification whether it be into new markets and verticals or even geographical. That has not changed. We're still going down multiple paths there. And much like the sales pipeline, it does not do me a whole lot of good to tell you we're near this, we are near that until we get to a point, whether it be an acquisition or joint venture or a strategic partnership, that we start to ink -- put ink on paper. Once we start to get down that path and toward that end and conclusion, then certainly we will make it public and known.

But certainly you have to understand that with our partnerships, joint ventures, even development of products internally or acquisitions depending on whom you are dealing with, if they are public or private or whatever, you are going to be very cautious until you really get to a point where you know a deal is going to get done. But suffice it to say, we're still pursuing all three or four of those elements as far as verticals in markets and geographical diversification.

And I'm going to assume in a perfect world if you could space things out the way you want, you may would not have the full impact on three call centers? In a quarter you would going forward if you could and you obviously cannot control when you win something, but you would try and space those out so that you don't have as much of a hit in the quarter?

Well, certainly this was an unusual quarter. When you sign clients towards the end or late third, early fourth quarter of the prior year, then it is 90 to 120 days later, so you are certainly trying to meet the demand that you signed them up for. So this quarter was a little unusual in that we had signed multiple clients toward the end of last year. Not the usual way we would do business obviously. We would certainly like to spread that out and not have the impact all in one quarter. But you know what, it happened that way. It is not a bad thing. We've got new clients. We have got better revenue streams. So we will take the impacts as they hit us now and look to improve that through the second half of the year.

Sure. In one of Rodd's remarks, you mentioned that there was 1.3 million of ramp costs in the quarter are training. And just doing a quick look at the numbers maybe year-over-year or quarter-over-quarter, it seems like that number might be higher. Maybe you're classifying some stuff differently, but can you help me better understand that, Rodd?

Well, there was the full impact. We did have one about 3 impact for the quarter in cost of sales. There was another 400,000 in SG&A that we had talked about as well. So the full impact for the quarter was more like 1.7 on the operation line.

Okay. That makes a little more sense. Can you give the basic and diluted share count again? I was writing some other stuff when you gave that.

Sure. The basic shares are 14,636,000. Fully diluted, 14,823,000.

David Grossman, Thomas Weisel Partners.

I was wondering if you could help me understand how many new clients will be serviced in the three new facilities that one that I guess is open and the other two that are I guess opened in April?

The two largest that we announced last year, late last year, David in the late third quarter, a large North American, a large Canadian.

Okay. So two clients and three facilities?

Correct.

And just I think you said, if I remember right, 4 to 500 seats per site. Is the vast majority of that capacity pretty much anticipated or kind of in hand, if you will, just based on normal volumes that you would expect from these three customers?

Yes, because, as I said earlier, we really have gone down a path of saying give us the commitment and we will go find you a center. So the commitments are there. There is never a commitment I guess as to the expedience of the ramp, but they seem to be following the plan at this point. Keep in mind, the large North American telecom we are also servicing out of another center that we already had. So they are occupying actually two centers already in the U.S. So the growth is there, but the process and the speed of the ramp always does vary.

Okay. And you talked a little bit about wage pressure. Could you maybe just briefly describe the mechanics? Once you have chosen a site and you have negotiated a contract, what wage start accelerating our wage increases start accelerating? Is there some kind of CTI kind of clause in the contract or something like that that would allow you to pass some of that through?

No, not typically at all. It is our business to run, and some of you expect us to know the data and the material and what the wage pressures could be. Most of the sites where we are starting to see wage pressures are existing sites that have been around for a number of years. We are starting to see more impact in those areas than certainly the new ones. Most of the agents come on board at a certain rate. Then after so many days, 60, 90 days, they are given increases anyway once they get through training developments, (indiscernible) and start taking calls.

Typically we have got great data. We work with the local economic development councils and folks in that area. We do a lot of research around what other businesses are typically paying for wages before we go into a community and see what the competition is. But, like I said, most of the time it is the communities that we have been operating in for quite some time and competition has moved in.

I guess just switching over to the Cingular comments, and I may have misunderstood this, but there were two components. This one was higher training costs on Cingular, but also lower revenue that are derived during certain training elements that you get paid far. Did I understand that correctly, and if I did or did not, can you just review those numbers again?

You absolutely understood it correctly. Cingular is still doing convergent training and trying to convert some subscribers that are still out there on the old AT&T wireless system to the new Cingular system. I think it has not progressed as quickly for them to get them converted over as they like. So we are still training agents on conversion training. We do get paid for that, but obviously the revenue dollars that get contributed to our topline from reimbursement for training or costs are not as significant as they would be if these agents were on the floor taking calls. So during the time they are in training, even though we're getting paid for training, they are certainly not generating the kind of revenue they could generate if they were out of training and on the floor taking those phone calls.

Right. So then how much was that? Did you quantify that? That impact on revenue? Okay. But you did say that there is about 1. -- was the 1.3 million exclusively related to Cingular and cost of sales of the incremental training costs?

No, we talked about 1.3 being the incremental costs of the ramp of the new centers. We did not quantify the impact of Cingular.

I see. Okay. I guess, as it relates to Cingular, you have mentioned that you are in renegotiations. As I recall, that contract is up for renewal at the end of the year. Is that right?

That is true. It expires at the end of this year. We are currently talking to them on the consumer and business side.

And given all the things that are happening with Cingular right now with their existing business, is it fair to assume that a lot of what you are doing now kind of may, in fact, benefit you in that new contract so that any changes, etc. are kind of being absorbed now or some of them may be being absorbed now as opposed to strictly relating to the Legacy relationship?

I think we believe there are going to be more opportunities there. Certainly because the relationship is strong, we think that if the merger all gets put together, you're looking at a $170 billion organization. We believe because of the kind of service levels that we have maintained with Cingular and AT&T and our reputation with them, that there will be more opportunities to come once they start to get through their process and figure out what they are going to need and how they are going to pursue getting it. But yes, we are very bullish on that relationship.

Right. Then I guess just finally it seems like we are all having a hard time kind of ascertaining how these costs flow and how they are going to flow through the balance of the year given that your revenues -- it sounds like as the new call centers come on, in particular you're going to have that revenue benefit. How should we think about the cost side of the equation? Do the costs flatten out? Do they increase but as a percentage of revenue become lower? I guess I'm having a hard time trying to gauge what kind of expense levels to expect throughout the balance of the year.

Well, typically I think what we have said is if you look historically, we watched I think the company, which preceded my time in 2004, launched three call centers as well during the course of that year. You can look historically and see kind of what the impacts were to margins at that point in time, and certainly you can see what they are at this point in time. If, indeed, these centers will be fully ramped by middle of the year, then you would have a pretty good indication of what the rest of the year should look like because most of those costs, if the ramps proceed as anticipated and has been indicated to us that they would, would hopefully be taken care of in the first part of this year, first half of this year.

So I think what you just have to do, David, is take some of the historical impacts that we have had. I think Rodd gave numbers on the last call of what the impact was in the fourth quarter to ramp Petersburg and then numbers this quarter of what is so far in the early stages of ramping for the two centers in Canada have impacted us. I think you just pull that forward at least for the next quarter and take a look at it from that perspective.

So the way to look at it is it was $1.7 million that are incremental costs in the March quarter. Is that the way to look at it?

Yes, I think that is a good way to start to analyze it. Absolutely.

Okay. And what were the costs for Petersburg in the December quarter?

I think the range that he had .75 million or about 1.2. I can't remember if you gave that specific or no?

I think that is it.

And would that be just the quarter before it actually opens, so three quarters to 1. -- or two quarters to 1.21 center and 1.7 is two centers, is that the way to think about it?

(multiple speakers). Well, I would tell you that you're looking at early stages of the two new ones because again they just came online the first part of April. So your ramp costs are probably still to come to some degree.

Right. So sequentially those ramp costs could go up in the June quarter?

Correct.

Jeff Nevins, First Analyst.

Just two housekeeping questions. Did you tell us what the total diluted share count was at the quarter-end?

Sure. The basic shares were 14,636,000, and fully diluted were 14,823,000.

And then you mentioned 4 to 500 seats per call center. Do you have about 18 call centers as stated in your press release, or is there an updated number?

18 is correct.

T-Mobile has a whole bunch of outsource suppliers, and I'm just curious if there is any initiative on their part to consolidate suppliers and if that is consistent with what you're seeing? And if so, do you think that creates more opportunity for you?

Certainly we don't know what their game plan is. I'm not sure they would actually come and tell you that they are going to do that. But our volume I believe with them was up for this quarter. We certainly I think just helped them win another J.D. Power award. So hopefully there will be great possibilities for us going forward with them. Our relationship with them is obviously very good.

So you have not heard that they are looking to consolidate their vendors?

They have not told us that specifically, and I'm not really sure that they would other than to tell you they have done it, and they are going to give you more business or something like that at the point they decide to do that.

Right. Okay, thanks.

(OPERATOR INSTRUCTIONS). Toby Sommer, SunTrust Robinson-Humphrey.

A couple of follow-ups. I just wanted to get a sense for when you conclude your discussions with Cingular, would we be able to expect to hear from you intra-quarter if you conclude something prior to your next conference call?

Do whatever degree we are allowed to announce, absolutely. And I plan on doing that. There is no doubt. That is a big thing for us too, so. And it is a material event. So certainly that is my thought is that we will tell you as soon as something is done.

)Caller: And then with Emmet's retirement from the board, I was curious if you have any expectation for changes in the composition of the board or if you've got any thoughts there?

Well, certainly we will find a replacement for Emmet because I don't think the board needs to be reduced in any way, shape or form. That is a process that is ongoing as we speak. So hopefully we will have something to announce there before long. But it is a process that we are in the middle of at this point.

So it is fair to say that you have got people in mind that you're speaking with now?

Yes.

At this time, there are no questions in the queue.

Okay. Well, thank you, everyone, for your participation this morning and listening to the call. Certainly if you have follow-up questions, don't hesitate to contact Jennifer, and we could certainly arrange some scheduled times to talk with you. Thanks for your continued support, and we will look forward to talking to you next quarter. If anything material happens during the quarter, watch for those press releases. Thank you, again. Bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you and have a good day.